The effect of the presentation format of bonus scheme on investors' judements and voting decisions

Abstract

This study investigates the effect of the presentation format of bonus scheme on investors’ compensation- and investment-related judgments. I propose that the format in which numerical information is presented affects investors’ judgments through the readability and halo effects. I assess these two mechanisms and their interaction effect by comparing bonus scheme presented in a table format versus in a formula format. The table format is more readable than the formula format. High readability increases the chance of a bonus scheme being approved by investors. However, the formula format looks more scientific than the table format. The favorable halo generated by the formula format (relative to the table format) can positively influence investors’ voting decisions on the bonus scheme.

I predict that high readability (versus low readability) and scientific appearance (versus a less scientific appearance) both positively affect investors’ evaluations of a bonus scheme. I also predict an interaction effect between outcome favorability (target-beaten versus target-missed) and bonus scheme presentation format (table versus formula format). When the actual performance beats the performance targets, investors are more likely to approve bonus awards that are presented in a formula format than in a table format, as predicted by the halo effect, and the readability effect is less likely to have an effect in this context. However, when the performance targets are missed, there is no significant difference in investors’ approval ratings for the different presentation formats. In this setting, the readability effect predicts a higher approval rating for the table format than the formula format, whereas the halo effect predicts the opposite result. The two effects are likely to cancel each other out.

This study provides evidence of how investors’ interpretations vary with the numerical information presentation format. It extends compensation disclosure research by exploring the information communication effectiveness of different presentation formats. It extends the halo effect research in psychology by demonstrating the halo effect in numerical information interpretation. The findings extend our understanding of investors’ decision-making by showing how the presentation format affects investors’ evaluations of and voting decisions on executive compensation scheme.